MGM For Sale: $5 Billion

Whoa! We thought that Kirk Kerkorian's $3 billion bid for MGM was just a random show of interest. Now, the studio's private-equity owners have asked Goldman Sachs to find buyers, and they're valuing the studio at $5.2 billion.

BusinessWeek: [T]hose with knowledge of the overtures say the company has asked Goldman, which advised the studio when it was last sold in 2004, to focus primarily on so-called strategic buyers—namely other entertainment companies that would likely fold MGM into existing operations. Among those who are said to have taken a look, and so far passed, is the Mumbai-based Reliance ADA Group, which is reportedly in the final stages of providing $500 million in funding to director Steven Spielberg to establish a new DreamWorks film company...

Sony paid roughly $5 billion in debt and equity in September 2004 to acquire the then-publicly traded MGM from its majority owner, billionaire Kirk Kerkorian. In a twist, Kerkorian is said to have recently offered roughly $3 billion for the 84-year-old company, a bid that was quickly dismissed.

The timing of this announcement is surprising, since CEO Harry Sloan just signed a new contract keeping him at the top of the studio for the next three years. BusinessWeek says he'll stay even if a new buyer is found (not that he'll have anything to say about it). Furthermore, the studio is quickly ramping up production under veteran executive Mary Parent.

You'd have to figure MGM would be sold or taken public eventually. It was bought by a consortium of private-equity firms, so it was inevitable that they would pursue an exit strategy. But it's unlikely anyone will buy MGM for $5.2 billion. The studio's had very few hits of its own, making most of its money off of its 4,000-film library.

Last year that catalog generated $558 million in cash, but the DVD market has begun to decline seriously. At the end of August, the company will get the last of a series of distribution fees totaling $625 million from News Corp.'s Twentieth Century Fox, which distributes MGM's DVDs. The private company lost $400 million in its most recent fiscal year, which ended in March, MGM told The New York Times recently...

MGM is still struggling under massive debt—$3.7 billion from the initial acquisition and $250 million it has committed from a $500 million revolving credit line its CEO, Harry Sloan, arranged for the company's United Artists unit. The first film under that fund—the 2007 Robert Redford-Tom Cruise-Meryl Streep flick Lions for Lamb—lost about half of MGM's $75 million investment. Another UA film, the World War II thriller Valkyrie, will cost $180 million to produce and market later this year.

UA, however, faces a ticking clock with its lender, Merrill Lynch, according to film industry sources. The MGM unit is required to make four films by May to keep its credit line, according to people familiar with the arrangement, and faces performance requirements if it's to continue drawing down the money.

Who might want MGM?

Most likely a "strategic buyer." Several are said to be interested in kicking the tires. Qualia Capital, an investment fund focused on media and entertainment, has already been approached by two different groups about acquisition financing, says one source with knowledge of the overtures. The New York-based fund refused comment. The most likely buyers include Sony, which owns a 20% stake. Fox might also be a buyer. Fox refused comment; Sony declined to comment.

We'd put our money on Sony or Fox, which also makes Fox an even less likely potential distributor for DreamWorks. But what about Terry Semel, who was rumored to be interested last month, or Ryan Kavanaugh's Relativity Media, which has put up some money for a couple of upcoming MGM films and the Financial Times reported was trying to arrange more?